PRACTICE 7 – CORPORATE STRATEGIES: RESTRUCTURING AND RETRENCHMENT PDF

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PRACTICE 7 – CORPORATE STRATEGIES: RESTRUCTURING AND RETRENCHMENT

OBJECTIVES: Identify corporate strategies  Identify the corporate strategy decisions regarding the restructuring of the business

portfolio and / or the retrenchment of the business  Search economic and business information  Write a report synthetically and reasoned

RECOMMENDED READINGS  Guerras, L.A. & Navas, E. (2018). Fundamentals of strategic management, Ed. Thomson Reuters.  Johnson, G.; Whittington, R.; Scholes, K.; Angwing,D. & Regner, P. (2017). Exploring strategy. Text

& cases, 11th. Edition, Prentice Hall, Essex. Chapter 8&9.  Johnson, G.; Whittington, R.; Scholes, K.; Angwing,D. & Regner, P. (2018). Fundamentals of

Strategy, Prentice Hall, Essex. Chapter 7.

METHODOLOGY: Individual and cooperative learning Stage 1. (Individual learning) Before the practice class. Read the news presented below about the company El Corte Inglés in order to answer the questions raised in the following stages. Stage 2. (Cooperative learning). During the practice class. Session 1. Task 1. Analyze the corporate strategy decisions that the company has carried out since its creation. a) Analyze the changes experienced in the corporate strategy of El Corte Inglés and determine in which cases it is possible to talk about restructuring the business portfolio or retrenchment. b) Why are these strategies carried out? What consequences have or may have on the company analyzed? Prepare a team report (maximum 2 sheets) and upload it to the Virtual Classroom. This is part of the continuous assessment.

Stage 3. (Cooperative learning) During the practice class. Session 2. Sharing and correcting task 1.

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El Corte Inglés: twelve changes (and one constant) since the last meeting (Aug. 2019) Marta Álvarez has finished her assault on these department stores, but sales remain stagnant despite the aggressive promotions On August 25, El Corte Inglés will celebrate its traditional shareholders meeting. Many things happen since the last one, marked by controversy. Arranged for the last week of August 2018, the annual meeting was the end of Dimas Gimeno as president of this department stores. This goodbye was closed with a last minute agreement, but that did not serve to end the fratricidal war that confronts him with the current president, Marta Álvarez, and her sister Cristina. Since then, the company set itself the objective of achieving a better investment grade by the rating agencies to access better financing conditions. Along the way, the company had two different presidents, faced a long judicial battle, made several divestments - both in business and buildings -, launched a bond issue and associated with new partners. However, a fact has remained unchanged: sales remain stagnant despite the increase of promotions. These were the main changes since the last meeting: 1. The end of the Dimas Gimeno era Dimas Gimeno was president of El Corte Inglés between 2014 and 2018. He was replaced by his cousin Marta Álvarez in June last year. Two months later, he resigned as director, after ECI payment of 8.5 million euros in an agreement signed before the shareholders meeting. Leaving his office did not end the confrontation between both factions of the family: the ex-president and his people began a legal war with numerous litigations that addressed the patrimonial society they share - IASA Stock Exchange -, controlled by the Alvarez sisters and that owns 22% of the commercial group, for supposedly irregular agreements. However, Gimeno is already considering new ways in the courts in order to maintain the pressure and reach an agreement to be able to segregate his actions of El Corte Inglés - owned indirectly through IASA - and thus facilitate a possible sale of 7% of the capital that adds up to relieve his debts with the Community of Madrid by the inheritance received from his uncle. 2. The goodbye of Jesús Nuño de la Rosa Jesús Nuño de la Rosa could be nicknamed ‘El breve’. At the head of the Travel division for a big part of his career, he was first appointed CEO and then president by the Álvarez sisters, replacing Gimeno. His main mission was to revitalize sales and achieve a better investment grade by rating agencies. Under his belt the main achievement was leading and obtaininig the refinancing agreement with banks during the spring of 2018. He barely had time. Two months ago, Marta Álvarez decided to establish herself as president, her eternal aspiration, after seeing the judicial front cleared with her cousin Gimeno. 3. Marta Álvarez, finally president In June, with the judicial horizon cleared after winning the litigations filed by Dimas, the board of directors unanimously approved her appointment thanks to her power both in the board of directors and in the Ramón Areces Foundation, reference shareholder of this department stores. 4. The changes in the dome of El Corte Inglés During the last year, Jesús Nuño de la Rosa placed some of his trusted at the top of El Corte Inglés that were quickly reaped by the Alvarez sisters people of trust. Javier Rodríguez Arias, in the financial department; and Javier Catena, in the real estate division (division inmobiliaria), failed to take the reins in front of the historic Óscar Fernández de Llano and Carlos Gordovil. 2

At the same time, Marta Álvarez revolutionized the purchasing department. She scrambled the women's area and followed closely the recommendations of the company's new consigliere, the British Jill Little – that came from John Lewis a high-quality products firm. 5. The cut back on costs of the headquarters El Corte Inglés commissioned the consultant AT & Kearney a report to know how to optimize their headquarters services. The objective is to detect all existing duplications and inefficiencies. With the study still underway, according to the official version, the first results reveal that it will affect 10% of the workforce in the purchasing, marketing, management, human resources and logistics divisions. As explained by several internal sources, the cuts have already begun, although covertly. During the last months, a historical trend in the company intensified: inviting headquarters staff to move to stores. Those who refuse are compensated with payments higher than those established by law in order to avoid shocks. "The intention is that headquarters staff is the minimum indispensable", says El Corte Inglés. The forecast: that the reordering takes place gradually throughout 2019. 6. A bond issue of 600 million euros In its mission to control the debt, El Corte Inglés is forced to look for new ways of financing. Thus, last September culminated a bond issue of 600 million euros to five years and with an annual interest of 3%. The company allocated the incomes to face the debt with the employees whose repayment expired before April 2019 and to cancel the most urgent debts with the bank - 765 million euros -. "This operation is a milestone in the company's financial history”. This issue was rated by Standard & Poors and Fitch with a rating BB+ and by Moody’s with a rating Ba1; in both cases a step below the desired investment grade, which allows access to better financing conditions. 7. The sale of fixed assets El Corte Inglés also assumed that the only way to reduce debt quickly was to sell part of its properties. Over the last twelve months, it got rid (deshacerse) of shopping centers in Valencia and Barcelona for 90 and 150 million euros, respectively. Both operations joined the divestments already undertaken a year ago in Madrid and Bilbao for 100 million euros. This helped reduce the liability (pasivo) by 467 million from 3,834 million to 3,367 million euros. However, the most important real estate operation that will take place shortly is the so-called Project Green: a package of 95 properties that includes shops, offices, parking lots and even residential land that was valued at up to 1.5 billion euros. The sale, commissioned to PwC, has barely aroused the interest of potential buyers so it is considered to change the strategy of selling all the properties as a whole and place the assets in small sets. 8. The new El Corte Inglés outlet. In their reports, the rating agencies regretted that El Corte Inglés is excessively dependent on its main shopping centers. In fact, El Confidencial reported in May that half of its establishments were at a loss. Among the initiatives to reverse the trend, the company create the Madrid Fashion District, a new outlet with brands that not pertain to El Corte Inglés, in which the nowadays Arroyosur store (Madrid) will be converted. This new store is an open space with commercial offer as well as multiple services and restaurants. Arroyosur was closed in July to start the works and expects to completed its transformation between April and May 2020. This new space will have 125 stores distributed over an area of 22,000 square meters and will add 3,500 parking spaces. It is expected to generate between 800 and 1,000 new jobs.

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This project is only a pilot test that wants to be extended to the rest of Spain. El Corte Inglés also registered the brands Barcelona Fashion District, Malaga Fashion District, Murcia Fashion District, Valencia Fashion District, Euskadi Fashion District and Canarias Fashion District. 9. The agreement with Alibaba In November, El Corte Inglés and Alibaba signed an agreement so that El Corte Inglés could take advantage of Chinese giant's payment system and storage in the cloud. Two months ago, both companies strengthened their collaboration so that the company headed by Marta Álvarez internationalize the company permanently. The first test was started in January with Unit, the children's fashion brand of Hipercor, by opening a store on Aliexpress. "It has undergone a very important sales advance in just six months and now we are working to start selling it online outside of Spain, especially in the euro zone and through the logistics platform that we are preparing to sell in Russia and in Eastern Europe ", Alibaba said in June. The next step is the inauguration of new online stores of six brands: three youth fashion (Fórmula Joven, Easy Wear and Green Coast), two sports (Boomerang and Mountain Pro) and a children's brand (Freestyle). "What we want is to expand the geographical sales area. What El Corte Inglés wants is to sell online outside of Spain through Aliexpress", the Asian firm added. 10. The (failed) renewal of the women's division In an operation designed personally by the president, El Corte Inglés decided to group all of its women's clothing brands under ‘Woman’ brand. "A good idea that was presented in the worst possible way", internal sources explain. The brand was put on sale in September without the official signage, which forced many shopping centers to store the clothes in the warehouse again until the furniture arrived. The lack of control caused that sales in the women's section decreased heavily in the first 20 days of the month, once the season sales (rebajas) were finished. The decline provoke the fashion section fall at the rate of 6%. This section passed to be one of the worst sections. At the end of the year, the figures reflected sales of 1,179 million euros, only four million more than in the 2017/2018 season. Instead of taking responsibility for, Álvarez chose to transform the top managers of El Corte Inglés. Advised by Jill Little, she decided to shake the purchasing department and dismiss the previous CEO of the women's division. 11. The sale of Óptica2000 Subsidiaries are another resource with which El Corte Inglés wants to obtain liquidity. Last February the company sold Óptica2000, its optical division, which has 106 stores in Spain and two in Portugal and more than 800 employees. The buyer was the Dutch group GrandVision, which paid 79 million to the Spanish chain. In addition, the department store board of directors commissioned several executives to study the sale of insurance, travel and computer businesses. In fact, some employees already work to obtain an internal valuation of the price of each of these companies. "The intention is to get rid of what is not the core of El Corte Inglés, but it has not yet been decided when or how", summarizes the company. The divestment that seems more advanced is that of the computer business. The French multinational GFI and the investment fund One Equity Partners are the best placed candidates to take over it, for which they would have offered around 300 million euros. 12. The Bricor integration Two years after integrating Hipercor, El Corte Inglés will now do the same with Bricor in search of “synergies in the area of purchases and sales”. El Corte Inglés will vote this merger at the next shareholders meeting. "We intend to improve and complement the commercial offer in addition to optimizing the commercial proposal and services for the customer," the company said. 4

The intention is to repeat the success of the merger with Hipercor. Thanks to the union of teams, the supermarket subsidiary managed to improve the implementation of the merchandise and reorganize the commercial spaces. "The positive results have prompted the decision to submit the Bricor union for approval”. The fact is that renovating Bricor was one of the urgencies of El Corte Inglés. Bricor subsidiary experienced a negative 2017: turnover fell 22.9% to 85.24 million euros and caused losses of 8.93 million (there is still no detail result from 2018). What does not change: sales are stagnant During 2018/2019, the company managed to increase profits by 28% to 258 million euros. This was made without much help from its main muscle: the shopping centers. The company celebrates that the margin on sales increased 1.5%. However, this percentage was only 0.7% in the shopping center division. "It's not about selling for selling, we've focused on increasing margins in this year”. Thus, El Corte Inglés struggled to make up the stagnation of the retail division, which barely raised its sales by 0.37% to 12,973 million euros compared to the growth of 3.2% from the previous year. Its contribution to EBITDA was only 0.31% - 881.9 million of the total 1,074 million. As explained by Economía Digital at the end of the fiscal year - on February 28 -, a stagnation was observed in almost all of the sections. The fashion section was the great example: it is the main muscle of the group and remained practically in the same figures obtained in the previous year. Sales figures were saved by Viajes El Corte Inglés, which raised turnover by 4.95% to 2,721 million and by the insurance division, which grew 9.25% to 199 million.

Source: https://www.economiadigital.es/directivos-y-empresas/el-corte-ingles-doce-cambios-y-una-constante-desde-la-ultima-junta_643805_102.html

El Corte Inglés sells its IT subsidiary to the GFI Qatari group for more than 300 million (NOV. 2019) In the meeting held today, the board of directors of El Corte Inglés has accepted the offer of the Groupe Français d'Informatique (GFI), controlled by Mannai Corporation, a business group originally from Qatar. The transaction will be done for the whole company for more than 300 million euros. Its offer has been imposed at the last moment to that of the US HIG venture capital fund, whose office in Spain is managed by Jaime Bergel and whose interests in Spain include companies such as Coffee & Tea, Puerto de Indias, Royo Group Bathroom, the park Isla Mágica, the Bodybell perfume chain or the Vértice 360 audiovisual company. Two different offers HIG's offer was aimed at controlling only 75% of the capital of the service company, leaving El Corte Inglés with the remaining 25%. In this way, the distribution company could take advantage of the potential growth of its IT services subsidiary, in the future sale of the group by the fund. HIG's offer also included an earn out clause: El Corte Inglés would receive an additional premium if the acquired company achieves compliance with the business plan. However, El Corte Inglés has decided to sell its subsidiary to Groupe Français d'Informatique (GFI), whose offer was for 100% of the company and in cash. GFI is a French company that has grown very rapidly in recent years with acquisitions in different European countries. The French group is controlled by Mannai Corporation, a business group from Qatar. It is considered that this fact (the third shareholder of El Corte Inglés is Sheikh Al Thani, from Qatar) would have helped to make the decision, although the main reason for accepting the GFI offer has been that it was for the entire company. 5

The agreement would include a commitment by El Corte Inglés to continue using IECISA equipment and services with the same intensity level as currently for at least five years, renewable for another five-year period, and at market prices and margins.

Source:https://www.expansion.com/empresas/distribucion/2019/11/27/5dde9df5468aeb13238b4667.html

El Corte Inglés refinances 2.3 billion euros to lower its debt and to enhance its transformation (Dec. 5, 2019) El Corte Inglés has launched a massive refinancing of 2.3 billion euros to lower the cost of its debt and enhance the new corporate strategy after the arrival of Marta Álvarez. The company seeks to take advantage of the decrease in interest rates in Europe and has transferred to financial institutions that ECI is lookin for lowering the cost of their debt to be more competitive. El Corte Inglés has asked its creditors for offers to cancel its current liability ( pasivo) and open up cheaper new financing channels. The entities have already responded with different proposals that will allow the group to reduce the cost of debt below the 3% obtained in the last bond issue made in 2018. The new financing methods will consist of a long-term loan of 1.2 billion and another 1.1 billion short-term credits to finance the working capital. This means for the company "to lower costs and to improve in debt maturity (vencimientos), in terms of reducing guarantees and in prices". For the banks, the refinancing allows them to obtain a large-scale client such as El Corte Inglés, in economy deceleration and at the first national signs of a brake in the loan application. “The cake will no longer grow. We have to be aggressive to eat other's portion and survive in the next few years”, explains an investment banker who knows the operation. This refinancing occurs before the distribution group achieves an update of its investment grade by the rating agencies. Financial sources believe that this will occur imminently and possibly during the ongoing refinancing process. Despite the absence of this note, the banks have valued positively the group's real estate assets, valued at 17 billion euros, in their offers, and the group's digital transformation plan. All the big banks that already participated in the last refinancing of the entity (in January 2018) have been invited to this operation. The operation was led by Santander group and by Bank of America Merrill Lynch and Goldman Sachs, which were the ones that fixed the price. The structure could be repeated in the new operation. Part of the new money will be invested in financing the strategic plan of El Corte Inglés. The plan was promoted last year by the President Jesús Nuño de la Rosa and the CEO Víctor del Pozo, after the abrupt departure of Dimas Gimeno from the presidency. With Marta Álvarez as president, and after the transition period led by Nuño de la Rosa, El Corte Inglés wants to accelerate this plan that has digital transformation as one of its main pillars. Boosting own brands and developing new businesses and services are two of the objectives included in the project. The online billing (facturación online ) of the group is already 15% of the total and El Corte Inglés wants to strengthen its online service so as not to lose positions in front of Amazon. Improving the online service, shortening delivery times and ensuring that store and web purchases are integrated is one of the challenges and requires heavy investments in logistics, technology, etc.

Source: https://www.elmundo.es/economia/2019/12/04/5de802d321efa0eb168b45ad.html

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